In the build-up to the British Bank Awards, we’ve asked some of the most innovative voices in the industry to share their thoughts on the future of finance. This article is written by Dev Kohli for Bud, winner of "Best Newcomer" at the 2018 British Bank Awards.
If you think too hard, you fall over.
Try it. Stand up straight and look at a fixed point on the ceiling a few feet in front of you. Now start to count backwards from 100 in units of one, then two, then three, then seven, then thirteen. As the mental task you’re working on becomes more taxing, try to concentrate on the amount of sway you’re controlling with your ankles. If you’re anything like the participants in some experiments run in 2002 at Uppsala University in Sweden, you’ll notice that the harder the task you’re performing, the more your ankles will be correcting the sway of your body.
The researchers were measuring the effect of a phenomenon called “cognitive load." It is a field of study in which psychologists study the effects of effortful, logical, conscious thought on the unconscious brain and is fundamental in understanding why people react favourably to some products and not others.
If we look at the way customers move around within the financial services industry as a function of two factors - “friction” holding them in place and “experience” that lures them to move - there is little doubt that open banking will shift the balance of power towards experience. With this reduction in the importance of friction, it makes sense to look at how businesses are beginning to adapt to this; one springs to mind immediately.
I first met Norris Koppel, the founder of Monese, towards the end of 2015. Over coffee, he discussed moving from Estonia to the UK and the six weeks spent trying to open a bank account - and how this experience shaped his business.
It bills itself as “banking without borders,” a bank for an increasingly mobile global population that allows you to use your data, wherever it is in the world, to establish your identity here in the UK. For me, Monese embodies the principles that the FCA has codified in the open banking regulations: that your data should be yours to own, and that you should be able to use it to help you achieve life goals.
It’s a simple concept, but in its execution, Norris has built a formidable business. Despite charging a fee, in stark contrast to challenger banks like Starling and Monzo, Monese has built up a significant customer base - 75% of whom treat Monese as their primary current account.
It’s also a joy to use. In terms of cognitive load and the stress incurred by uncertainty, it’s easy to see why customers are so enthusiastic. A new account takes 2 minutes to set up, requiring only a selfie and a photo of a passport or state-issued ID card. Even its most basic account includes instant feedback on spending decisions and a simply-designed app provides quick access to transaction history. It’s a masterclass in taking a problem with high cognitive load, one that makes enormous demands of a customer’s working memory, and replacing it with a solution that uses almost none.
Those who doubt the potential impact of open banking need only to look around and see what happens to other industries when the power balance between the establishment and newcomers is disrupted.
Thomas Cook shares lost almost 90% of its value between 2007 and 2012, a year in which the British high-street lost just shy of 2000 travel agent retail outlets. The barriers to the creation of a DIY holiday culture were simple. Customers needed access to the right data and an internet connection fast enough to make the experience feel seamless. Suppliers needed the cost of computing power to come down, and the ability to publish their data somewhere it could be found and used. Just like open banking there was a confluence of technological shifts that combined to facilitate a cultural one, and just like open banking the result for those slow to react was catastrophic.
The same pattern played out in the media space. Barriers to entry come down, new players crop up, the market fragments and new cultural norms establish themselves. It is estimated that brands will spend more than $1billion paying instagrammers to post about their products in 2018. A market which had previously been locked down by the huge cost of entry has been turned on its head inside a decade.
In the financial services space the changes may not be so fast, but they will be far more profound. Our relationship with our money is far more sensitive than our consumption of media and reaches much further than our relationship with our leisure time.
If you look at the common factors in the disruption of the travel and media industries you are led inevitably towards a picture of what will happen in financial services. When centralised power is broken up in any market, the shards work their way to the bottom. What better example is there than Monese, a bank for immigrants, a bank creating a profitable market out of people the incumbents don’t want to touch.
This is the fundamental shift.
I talked at the beginning of this piece about the way humans react physically to psychological triggers, how good design can give us hits of dopamine and serotonin, how it makes us happy. I did so because I believe it will be the key battleground for the future of financial services. In an environment where the power balance has shifted fundamentally in favour of the consumer, we will be buying products based on different criteria.
Geographic proximity of a branch was once a key factor but, if the branches all come to you, this ceases to mean anything. Price is (obviously) still important, but in world where your data can be used to assess the exact level of coverage (insurance) or your exact risk profile (credit) or your exact affordability criteria (mortgages) then there will surely be a significant harmonisation of price points. Again the differentiator means nothing. In this environment, what is left for us to use to choose between financial services other than how they make us feel?